#medieval finance

[racefortheironthrone]

If the King/Queen of Westeros decided to implement a national bank of Westeros, how would they navigate relationships with the Iron Bank and any perceived competition? Thinking of the same way that the Rogare Bank might have fallen to Faceless Man assassinations?

I would personally recommend a more cooperative policy, because there are definite ways that a Westerosi central bank could be of benefit to the Iron Bank - especially since central banks don't tend to compete with merchant or commercial banks for the same kind of business.

To begin with, the existence of a central bank acting as lender of last resort to Westerosi moneylenders and merchants is going to be good for the Iron Bank's business in Westeros, because that's going to massively reduce the risk of default, which would mean the Iron Bank's loans would see a higher rate of return even at lower interest rates, and likely would lead to an increased volume of business, as more people would be able to afford to take out loans from the Iron Bank.

If the Westerosi central bank is anything like the central banks of Early Modern Europe, it might be quite possible that the Iron Bank would become a minority shareholder in the Westerosi central bank, and quite likely would be one of the central bank's major customers when it comes to the sale of royal bonds - if only because the existence of a central bank would make Westerosi public debt a much sounder investment than under the medieval model.

[racefortheironthrone]

Could the Iron Throne be able to issue bonds, to finance its expenses, instead of going to the Iron Bank for a loan?

A government issuing bonds is the same thing as the government taking out a loan. The main difference is that, in the case of issuing a bond, the government is spreading out its borrowing between many lenders by selling bonds on the open market to anyone who wants to buy them rather than having that loan owed to a single entity like the Iron Bank. This means that the government is less beholden to any one creditor and it's less likely that the government's creditors can use their economic leverage to affect government policy.

The second advantage of structuring government debt through bonds is that it allows the government to break its total borrowing needs into smaller, more affordable units. Very few financial institutions would have had the capital to finance the £1,200,000 that made up the government's inaugural loan at the Bank of England in 1690 - but a lot more people could afford to lend the government £10, £25, £50, or £100 pounds.

Between this and later innovations in marketing bonds to the general public, the market for government debt was massively expanded. Not only did this create a class of rentiers who were now personally invested in the government's success, but it also immediately deepened the capital markets by creating a large supply of stable assets that could be bought and sold and borrowed against. While some of the shortcomings of the Hamilton musical and Chernow's biography have become more obvious in hindsight, they're not wrong about the impact of Hamilton's policies as Treasury Secretary on the development of the American economy.

The difficulty facing the Iron Throne in adapting an early modern system of government finance is that it doesn't have the state capacity to run this kind of an operation: it doesn't have a central bank to act as the government's marketer, issuer of banknotes, and lender of last resort; it doesn't have a sinking fund to manage the level and price of debt; it hasn't issued charters to merchant's guilds or joint-stock companies that could combine the small capital of individuals and thus more easily afford to buy bonds; and it doesn't have enough literate people who've studied accounting to staff a royal bureaucracy large enough to coordinate and keep records of all of this economic activity.

[racefortheironthrone]

For the Iron Throne, how would you create a distinction between the Royal Household and Crown finances..

Chiefly, through administrative changes.

What you need is to have something like the King's Steward from the MUSH or the IRL Lord Steward who is in charge of the finances of the royal household and the monarch's private incomes, while the Master of Coins' portfolio is redesigned to be in charge of the finances of the royal government and tax revenues.

[racefortheironthrone]

I just read your Who Stole Westeros article (great onde, btw!), and it got me thinking: how could the crown undo all the financial damage Littlefinger did?

This is something that I've discussed in bits and pieces, but I think it's a good idea to have one place where I lay out my ideas.

Accurate Intelligences

The first thing that needs to happen is that the crown needs to get an accurate understanding of its finances and make that understanding known to the necessary stakeholders. This starts with a very thorough audit of both the Crown's books and Littlefinger's books, preferably done with the participation of the Iron Bank (not only do they have the necessary expertise to see through Baelish's fraud, but bringing them into the process at an early stage will make later negotiations easier because they're more likely to feel "part of the team" and not like a bombshell's been dropped on them).

The second step is, I would argue, a document laying out, in detail, what the Crown's incomes, expenditures, and debts actually are - and the extent of Littlefinger's fraud and embezzlement - is absolutely vital for rebuilding trust from the Crown's major creditors. Think of this as a somewhat more private (and hopefully more honest) Compte Rendu. Not only is having an accurate understanding vital for future policymaking, but it's also a way of framing the overall narrative to your creditors that defines the universe of how much you can afford to pay back and how much you should pay back.

Debt Forgiveness

After the full scope of the economic damage is known, the first priority should be to A. recoup as much of the losses as possible, and B. reduce the debt that has to be paid as much as possible. As far as A goes, the absolute de minimus strategy should be to seize the entire Baelish estate - not just the gold, but also the brothels, the ships, the commodities futures, the debts of various noble houses and merchants, the lands and titles belonging to Harrenhal - and those of all of his minions in the royal bureaucracy, and use that to improve the royal income-to-debt ratio by paying off some of what's owed, with as much as possible going to principal over interest.

Secondly, there's a strong need for debt relief. That's a touchy subject around creditors, but it's still one that has to be faced - and is made somewhat easier by the War of Five Kings. So if Renly or Stannis had won, it would absolutely been in their interests to declare the Crown's debt to House Lannister repudiated on the grounds of treason, thus reducing the total owed by 50% (assuming that the Crown actually owes 3 million to House Lannister and 6 million overall). On the flip side, and this is somewhat paradoxical, it is rather surprising that at no point after the death of King Robert does the Lannister regime forgive debt it effectively owes to itself, even if that would be to its ultimate advantage.

Restructuring Finances

Ultimately, though, the nice thing about being a government is that (barring a revolution or foreign conquest) you are effectively immortal, and thus even staggeringly huge debts can be dealt with - over a long enough time horizon. Look at the example of British war debt:

It turns out, constantly fighting imperial wars and then having to fight two world wars is very expensive, but just hanging on as a going concern was enough to gradually reduce the debt-to-gdp ratio down to manageable levels. It really helps if you have a central bank, a sinking fund, and strong levels of economic growth, but just staying alive is the big ticket.

However, in order for time to heal all wounds, one of the things that has to happen is some debt restructuring aimed at reducing the interest rate owed on the royal debt. Pretty much all previous steps I've outlined, from sharing information to cultivating stakeholders to paying off as much as you can from Littlefinger's coffers, etc. are aimed at trying to soften the negotiating ground for this step, because medieval interest rates were really high (largely as a hedge against frequent defaults), around 12% on average. It's pretty hard to grow your way out of that, so bringing down those rates is the top priority. Once you've gotten them as low as you can, you want to negotiate for the longest repayment window possible.

[racefortheironthrone]

Curious what your take is on the Iron Bank's loan to the Night's Watch. It's an interesting case in that both the IB had no (apparent) stake going into it (compared to Stannis, where the royal debts are A Big Deal) and the NW doesn't seem to have much in the way of stable long-term income. How do you think the IB looks/will look (besides Tycho) at it, what do you think they're expecting out of it, etc?

It’s an interesting example of an institutional, rather than individual, loan in ASOIAF - and that institutional nature is key to explaining why the loan happened:

Tycho Nestoris had left behind a copy of their agreement. Jon read it over thrice. That was simple, he reflected. Simpler than I dared hope. Simpler than it should have been.

It gave him an uneasy feeling. Braavosi coin would allow the Night's Watch to buy food from the south when their own stores ran short, food enough to see them through the winter, however long it might prove to be. A long hard winter will leave the Watch so deep in debt that we will never climb out, Jon reminded himself, but when the choice is debt or death, best borrow.

The Night’s Watch is cash-poor but asset-rich. They’ve got lots of land and, if Jon can put enough of it under the plow with wildling labor, can produce a surplus to pay back the Iron Bank come the spring. But first they have to get through the winter, and to do that they need to “buy food from the south” with “Braavosi coin.”

More importantly, the Night’s Watch isn’t a man who can die without heirs, extinguishing their debt. It’s an immortal institution that’s lasted eight thousand years, so as long as it continues to exist, it can continue to make payments on its loans - and that’s what’s in it for the Iron Bank. The Bank doesn’t make its money on prompt repayment, it makes it on interest payments, so an institution that can carry debt for a long time means many years of interest payments being made, adding to the total profit made on the loan, especially when you consider simple versus compound interest. 

[racefortheironthrone]

By Popular Demand: "Who Stole Westeros?"

By Popular Demand: “Who Stole Westeros?”

Who Stole Westeros? One of the most persistent controversies of fact among fans of A Song of Ice and Fire is the question of whether Robert Baratheon or Petyr Baelish is responsible for the Iron Throne’s bankruptcy. Many leading scholars of our community have tackled the question (including one of the contributors to this volume); it’s a common topic of debate on r/asoiaf and Westeros.org, as…

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[racefortheironthrone]

Hey, I've been looking up stuff about the finances of the Iron Throne to understand some stuff I didn't notice on reading, and I see that in a couple of places you refer to a seeming discrepancy in Littlefinger's success rate with the customs in Gulltown. The 10fold figure comes from Lysa & the 3fold figure comes from Tyrion, in the context of his studies of the ledgers. Doesn't this basically just suggest hyperbole from a character whose incompetence is one of the 1st things we learn about her?

Here’s why I don’t think it’s just hyperbole: this isn’t the only place where Littlefinger and tenfold increases comes up.

 In A Storm of Swords, Tyrion states that while “crown incomes are ten times higher than they were under Aerys… [so] are the crown’s expenses.  Robert was as generous with his coin as he was with his cock… the incomes are considerable, but they are barely sufficient to cover the usury on Littlefinger’s loans.”

As I explain in my essay, this claim on its own is suspect, because if incomes have grown by tenfold (highly unlikely on its own) and so have expenditures (likewise highly unlikely), then debt-to-income shouldn’t have grown, but somehow a tenfold increase in income is only sufficient to cover the interest rate, let alone the principal of the loan. 

To me, this makes Littlefinger’s claims from Gulltown part of a pattern of behavior, where he makes extravagant claims of increased income, and then takes on much larger levels of debt than would be necessary to meet expenditures. (For example, his practice of not paying back any principal on the debt and taking out new loans to pay the interest, which is accounting malpractice likely covering up fraud.)